Harper losing his ace in the hole as economy shows signs of slowing

Statistics Canada is about to get in the last word, and it doesn’t sound good.

It’s certainly not what Stephen Harper, whose Conservatives are running on the economy, will want to hear only days before the May 2 election, but analysts are warning that Statistics Canada on Friday will likely report that economic growth has stalled, or worse.

Ironically, it’s also the last thing, or at least last major economic report, that Harper will hear from the federal statistical agency, with which his government has been at loggerheads, before Canadians go to the polls.

“Canada’s monthly GDP winning streak is about to sputter,” says CIBC World Markets economist Emanuella Enenajor. “The Canadian economy likely paused in February after four straight months of hot growth.”

And it’s not expected to be just a temporary slowdown.

It’s also likely the start of what the Bank of Canada has warned will be three-year growth slump — from 3.1 per cent last year to 2.9 this year, 2.6 in 2012 and just 2.1 in 2013 — with the expansion dampened by government and consumer spending restraint, and fraught with “downside” risks, including record household debt here and political and financial uncertainties around the globe.

The slowdown, however, won’t save Canadians from higher interest rates in light of last week’s report that inflation in March surged to 3.3 per cent, well above the ceiling of the central bank’s one-to-three-per-cent inflation target range, and more than a full point beyond its two per cent target.

The inflation “shocker” triggered warnings that the central bank will start raising rates again sooner rather than later.

“Beyond the first quarter, the heady pace of growth is likely to slow, but remain robust enough to encourage the Bank of Canada to tighten monetary policy at their July meeting,” Enanjor said.

And just as Friday’s GDP report may be the start of the growth slump, the next interest rate hike will likely be the start of an expected steady run-up in rates that will also act as a drag on growth and add to the already high debt burden being borne by Canadian households, not to mention even more deeply indebted governments.

While the central bank has repeatedly issued warnings about rising household debt, BMO Capital Markets economist Douglas Porter noted that one of the major reasons Canadians are so deeply in debt is that they’ve been enjoying some of the lowest real or after-inflation borrowing rates ever.

“In fact, the chartered bank prime lending rate, currently at three per cent, is now below inflation for one of the few times in the past half-century,” he said, pointing out that the prime rate, to which most consumer and business loans are linked, has typically been four points higher than inflation, not below inflation as it is now.

“And it’s not just short-term interest rates that are on the wrong side of inflation,” Porter said, noting that 10-year government bonds are also now below inflation, suggesting governments may have also been lured deeper into debt by low borrowing costs.

So if inflation goes even higher this month, as is expected, and the central bank doesn’t start raising rates shortly after, “then they can hardly complain about record household debt levels when Canadians are simply being logical by borrowing heavily in the face of deeply negative real interest rates,” Porter added.

BMO, however, projects the central bank will be raising rates shortly and that its key rate, now at just 1.0 per cent, will rise to 3.5 per cent by the end of next year, which would trigger matching increases in rates on consumer and business loans.